RBA defies cut expectations with July hold

The RBA held the cash rate unchanged at 3.85% at today's meeting, as a 6-3 majority on the Monetary Policy Board defied widespread expectations for a 25bps rate cut. The surprise decision forced markets to backpedal, the Australian dollar traded nearly as high as US$0.6550 from $0.6510 pre meeting and a sell-off in the bond market drove the 3-year yield 11bps higher to 3.4% by the close. Having already eased by 50bps with cuts in February and May, Governor Bullock said the Board was maintaining a 'cautious, gradual approach' and today's hold was about 'timing rather than direction'. The Board will await more information - including the June quarter CPI report (due July 30) and new RBA staff forecasts - to confirm that inflation is on track to hold at the midpoint of the 2-3% target band before moving again. The next cut looks likely to come in August - but as today showed, nothing can be assured.  

Markets were expecting a cut today only to be surprised as the RBA took a different view on the data and its policy guidance. The misalignment in views only increased as today's meeting drew nearer, largely because a void of policy-relevant speeches or appearances from RBA officials had left expectations for a cut to climb unchecked. At the post-meeting press conference, Governor Bullock pushed back on that version of events, saying that it would not have been appropriate for the RBA to guide markets prior to a meeting. But today's situation is clearly unhelpful to a newly formed Board and to an RBA that has worked to revamp its communications following the review into the central bank.  

Today's decision statement effectively revealed that little had changed for the Board since the May meeting. The labour market remains in robust shape, with the Board continuing to judge that conditions are tight. Although economic growth was subdued in the March quarter (0.2%q/q, 1.4%Y/Y), the Board did not see that as posing an increased risk to the expected pick-up in household consumption. Neither was it convinced by the slowing in inflation (2.1%yr headline, 2.4% core) in the monthly CPI gauge for May. In fact, Bullock pointed to upside risks to inflation from the monthly indicator, citing home building and durable goods prices. When it comes to inflation, the line has basically been drawn in the sand that it is only the quarterly CPI reports that the Board is prepared to move on. Further to that, Bullock said the Board will look to the Q2 CPI report to confirm that inflation is falling in line with its forecasts. Should that be the case, a cut is likely on the cards for August. 

Events offshore around global trade were still considered highly uncertain, a key factor giving the Board reason to pause. The RBA expects global growth will be weaker due to the US administration's tariff agenda. In an Australian context, the spillover effects on household spending and business investment are what the RBA is waiting to gain greater clarity on. The next RBA monetary policy meeting is on 11-12 August. 

Preview: RBA July Meeting

Receding inflation risks and a fragile household sector have a 25bps rate cut from the RBA firmly in the frame for today's meeting (decision due 1430 AEST). Markets price a 25bps cut in the cash rate from 3.85% to 3.60% as a near lock, with two further cuts discounted by year-end. After the first two cuts of the easing cycle in February and May were separated by a pause in April, the expectation is that slowing inflation and subdued economic growth has opened the door to back-to-back cuts. However, the labour market remains robust, with solid momentum in employment keeping the unemployment rate low at 4.1%. 

The RBA's last rate cut in May was dovish beyond the decision itself and largely set the stage for a follow-up move today. The Board elected to cut by 25bps but the surprise revelation came from Governor Bullock at the post-meeting press conference that a larger 50bps cut had been discussed. The uncertainty around global trade in response to the US Administration's tariff regime was a clear factor, but the meeting minutes would later reveal that the Board concluded that domestic conditions 'could, on their own, justify some degree of reduction in the cash rate'. 

New forecasts published by the RBA at the May meeting downgraded the outlook for the Australian economy. Forecast GDP growth (in year-ended terms) was lowered from 2.4% to 2.1% this year and from 2.3% to 2.2% in 2026. Risks to this outlook appear to be to the downside after a soft March quarter where GDP growth came in at just 0.2% quarter-on-quarter and 1.3% year-on-year. For growth to pick up as the RBA expects, the household sector will be key. But consumption growth was tracking at a weak pace (0.4%q/q, 0.7%Y/Y), a clear sign that the RBA will need to continue dialing back policy restriction. 

Inflation is not standing in the way of further RBA cuts. In the March quarter, inflation returned to the 2-3% target band on both a headline (2.4%) and core basis (2.9%). This led the RBA to lower its projections, with core inflation now seen tracking nearer to the midpoint of the band at 2.6% across the forecast horizon out to mid 2027. May's reading of the monthly CPI gauge suggests that inflation has continued to cool since the end of the March quarter. Headline inflation was pressing the bottom end of the band slowing from 2.4% to 2.1%yr while core inflation eased from 2.8% to 2.4%yr.

Macro (Re)view (4/7) | United front from central banking chiefs

It was tougher going for risk assets this week as the outlook for Fed easing was pared back and fiscal and deficit concerns returned to the fray. It was a united front from central bank chiefs at the ECB's Sintra Forum as the keynote panel, which included Fed Chair Powell, indicated patience was the optimal policy approach at present. After a strong US employment report markets now price just 2 cuts from the Fed by year-end, giving little chance to a 3rd cut that was previously seen as a 50/50 prospect. Adding upward pressure to Treasury yields was the passage of President Trump's fiscal bill, estimated to add $3.4tn to the US deficit over the coming decade. In the UK the gilt market sold off due to renewed concerns over debt sustainability, but this was tempered by comments from BoE Governor Bailey hinting that the pace of quantitative tightening could slow.   

A robust US employment report broadly validates the Fed's patient stance amid rising pressure from President Trump to lower rates. Nonfarm payrolls rose by 147k in June, an upside surprise on the 106k consensus. This saw the unemployment rate fall from 4.2% to 4.1%, defying an expected drift up to 4.3%. A slight fall in participation (62.3% from 62.4%) was a factor behind the lower unemployment rate, but employment growth is still tracking at solid pace deep into the post-pandemic cycle, averaging 150k over the past 3 months. Meanwhile, average hourly earnings growth eased from 3.9% to 3.7%, indicating that while conditions are robust tariffs rather than the labour market pose more of an inflationary risk going forward. 

ECB President Lagarde reaffirmed this week in Sintra that policy is in 'a good place', a signal heeded by markets that are not discounting the next rate cut until December. Lagarde, speaking to outline the findings of the ECB's strategy review, said the Governing Council will deliver 'appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the (2%) target in either direction'. Data this week showed euro area inflation sits at 2% on a headline basis as of June, firming from 1.9% on the back of higher energy prices. Core inflation was unchanged at 2.3%yr.  

An underwhelming 0.2% rise in retail sales for May reiterated Australian households remain under pressure, firming expectations for the RBA to continue its easing cycle at next week's meeting. Deferred winter clothing sales were the only thing that saw retail sales hold up against declines in most other categories (see here). Sentiment is weak and households are cautious. There are enough signs for the RBA to reach the conclusion that the expected rebound in household consumption is at risk of falling behind the curve without additional support. 

The RBA's two earlier rate cuts came in February and May, following the quarterly inflation reports. But as covered last week, the RBA will probably have enough conviction in the disinflationary process to make an earlier move after headline and core CPI slowed sharply in May to 2.1%yr and 2.4%yr respectively in the ABS's monthly gauge. In other news from Australia, national dwelling approvals stemmed a run of declines with a 3.2% rise in May (see here); while the trade surplus halved to $2.2bn in May after imports accelerated at their fastest pace for the year and exports declined, with US-bound exports retracing the month after the announcement of the administration's liberation day tariffs (see here).  

Australia's trade surplus narrows to 4½-year low in May

Australia's trade surplus halved in May to $2.2bn, its narrowest since August 2020 - defying expectations to come in at $5bn. The surplus fell from $4.9bn in April, revised down from an initial estimate of $5.4bn. Imports (3.8%) lifted at their fastest pace since last December as exports (-2.7%) declined for the third time in the past 4 months. US-bound exports normalised the month following the Trump administration's liberation day tariff announcements.   

The trade surplus narrowed sharply from $4.9bn in April to $2.2bn in May, its lowest level going back to the early days of the pandemic in August 2020. The narrowing came on the back of a decline in exports (-2.7%) and a rise in imports (3.8%), the latter posting its fastest uplift of the year. Across the past 3 months, the trade surplus averaged $4.4bn. 

Exports were down 2.7% for the month in May coming in at $42.4bn, turning annual growth negative to -1.6% from 2.2% prior. Declines in the month were seen across all major categories: rural goods -3.5%, non-rural goods -2.4% and non-monetary gold -3.4%. Non-rural goods saw their 4th fall of the past 5 months, with LNG (-11.5%) and coal (-2%) driving the weakness in May. Meat (-15.7%) and wool exports (-16.5%) hit the rural goods category.  

After surging to front run the Trump Administration's new tariff regime, exports bound for the US retraced to around $2bn in May having touched as high as $6bn in January.   

Import spending lifted by 3.8% in May, rising through $40bn to a new record high. Annual growth increased from 5.5% to 6.9%. Capital goods were the key driver surging by 8.6% coming off a similar gain in April (8.5%). Meanwhile, consumption goods were up by 3%, underpinned by a strong rise in vehicle imports (7.9%). Intermediate goods (1.8%) rose for the first time in 4 months, with the falling value of fuel imports being a major driver of that weakness.  

Australian dwelling approvals rise 3.2% in May

Australia's dwelling approvals series lifted for the first time since the opening month of 2025 rising by 3.2% in May, a slight miss on consensus for a 4% increase. The gain was led by a 9% surge in the unit or higher-density segment, but that only partly reversed recent weakness. House approvals were broadly flat on the prior month's total. Approvals remain at historically low levels, a legacy of the RBA's earlier tightening cycle and pandemic-related supply constraints in the construction sector.  

Headline dwelling approvals saw a 3.2% lift to 15.2k in May, the first gain in the series in 4 months. This turned the tide somewhat on a run of declines through the past 3 months: February -1.2%, March -7.1% and April -4.1%, and left approvals up 6.5% on a year ago. Nonetheless, approvals are well contained and are more than one-third below their 2021 cycle peak (22.9k). 

In May, higher-density approvals were up 9% to 5.7k. After starting 2025 with a large 15.7% rise, approvals in the segment went onto fall by 30% across the February-April period. This weakness was centred mainly in high-rise approvals in Sydney and Melbourne. Other higher-density approval types (low-rise and townhouses) look to have been holding up against the high-rise weakness. 

House approvals were broadly unchanged in May at a tick over 9.5k, a level 3.2% higher than 12 months ago. Approvals in this segment have remained in a tight range for over a year, showing little sign of breaking to the upside. The RBA's easing cycle - set to continue next week - may be the catalyst required.     

Australian retail sales up 0.2% in May

Australian retail sales rose 0.2% for May, an underwhelming outcome relative to expectations (0.5%) coming off a flat month in April (revised from -0.1%). Sales were driven by the fastest rise in the clothing and footwear category since early last year (2.6%) after households had deferred winter clothing purchases. This offset weakness across other categories, but momentum in retail sales is weak as cautious households remain reluctant to spend. The report adds to the case for the RBA to lower rates next week.     

National retail sales lifted by 0.2% month-on-month in May to $37.3bn, the level up 3.3% on 12 months ago but down from a 3.8% pace last month. Although inflation has eased significantly and the RBA has cut rates twice this year, the higher cost of living and weak sentiment have been keeping households quiet. Sales growth has averaged just 0.1% across the past 3 months.  

At the category level, clothing and footwear sales accelerated by 2.9% in the month - its strongest rise since February 2024 - after warmer weather saw households delaying winter clothing purchases. This had the effect of holding up headline sales growth against outcomes that were either flat or negative in the other categories (see table above). It also led discretionary sales (0.6%) to post their fastest rise in 6 months. But, overall, this was a weak report consistent with households remaining constrained.    

Sales growth across the states has been volatile month to month in 2025, as shown in the chart below. In the two largest states of New South Wales and Victoria, sales were up 0.1% and 0.2% respectively - very modest rebounds in the context of their declines in April (NSW -1% and Victoria -0.4%). Sales in Queensland stabilised (0.1%) from the post-cyclone rebound in April. Meanwhile, sales momentum in Western Australia remains the strongest of all states rising by a further 0.7% in May, their 7th consecutive rise. 

Macro (Re)view (27/6) | US equities to new highs

Easing concerns around trade and geopolitics and a dovish repricing of the Fed outlook saw investors sending US equities to record highs and unlocked more downside in the USD to lows since 2022. As a result, the AUDUSD north of 0.65 is trading on its highs for the year - despite rising expectations for RBA easing - while the EURUSD through 1.17 is at levels last cleared in 2021. Euro appreciation could extend the ECB's easing cycle, though President Lagarde remained non-committal in her latest remarks to the EU Parliament. The weaker USD looks partly fundamental and partly sentiment driven. Lower treasury yields led by the front end reflect the fundamentals, with a case for Fed cuts building around weaking consumer demand. On the sentiment side, a WSJ report that President Trump may accelerate the timeline to announce a successor to Fed Chair Powell due to dissatisfaction over the Fed's patient approach to easing was a key factor. 

Inflationary concerns from the impact of tariffs are keeping the Fed on hold for now but markets are increasingly confident that US monetary policy is too restrictive, pricing in 3 cuts by year-end. Fed Chair Powell held a cautious line in front of Congress this week reiterating that policy was "well positioned" and would be guided by the incoming data. The fact that the Fed's preferred inflation measure - the core PCE deflator - lifted from 2.3% to 2.7%yr in May - above expectations and only just after the liberation day tariffs were announced - speaks to Chair Powell's messaging. 

But some Fed members (Waller and Bowman) have been vocal in disagreeing with that stance and lean towards cutting rates. The case for rate cuts is supported by signs of weakness in demand. March quarter GDP growth was revised from -0.2% to -0.5% (annualised) on the back of a sizeable downgrade to personal consumption growth (0.5% from 1.2%). This was followed up by a 0.3% contraction in real spending in May, pointing to increased caution from households.  

Swaps pricing for an RBA rate cut in July has firmed to a near-lock (90%) after Australian inflation data for May cooled sharply. A total of 3 rate cuts are priced into the curve by year-end, which would bring the cash rate down to 3.1% from 3.85% currently. The central narrative is that constrained households will require more support if they are to underpin the pick-up in economic growth the RBA has forecast. Disinflationary progress gives the RBA scope to ease with the labour market still strong. This week, job vacancies were reported to have lifted by 2.9% for the 3 months to May to stand at 339k or 2.2% of the labour force - elevated levels however measured. 

Headline inflation meanwhile has fallen to the bottom of the RBA's 2-3% target band printing at 2.1% in May from 2.4%yr in April, undershooting expectations to remain unchanged. Price declines in volatile items (fuel, fruit and holiday travel) were key drivers, but price pressures are also easing more broadly across the basket. This was reflected in core or trimmed mean inflation slowing from 2.8% to 2.4%yr, with services inflation down from 4.1% to 3.3%yr - both measures now at their weakest pace in at least 3 years. My review of the May inflation report has more detail here. 

Australian CPI slows to 2.1% in May

Australian inflation has continued to cool, validating the near 80% chance markets have assigned to an RBA rate cut in July. Headline CPI inflation is now pressing the lower end of the RBA's target range after slowing to 2.1%yr in May - well below the 2.4% outcome expected and its slowest pace in 7 months. This was backed up by core inflation (2.4%) that is a tick below the midpoint of the band and services inflation (3.3%) running at a 3-year low.  

The ABS's monthly CPI gauge clocked prices falling by 0.4% in May. This was the weakest outcome in 2 years, lowering the annual rate from 2.4% to 2.1%. Price declines in key items including fruit (-2.7%), fuel (-2.9%) and holiday travel (domestic -9.2% and international -4.8%) contributed heavily to inflation falling in May. 

Electricity prices have been pushing up on inflation over recent months as the effect of government rebates has been winding down. This continued in May as electricity prices rose by 2%. The ABS highlighted that most households in Victoria received only one installment of the Federal government's rebate in May (compared to two for households billed in April), and this was a key driver of the latest increase. Nonetheless, electricity prices were still 5.9% lower than 12 months prior. Since coming into effect in mid 2023, the ABS estimates the rebates have spared households from a 17.7% rise in electricity prices over the period, with retail prices instead rising by just 1.1%. 

 

Being the middle month of the quarter, the May report included a broader update of services prices than in April. Encouragingly, inflation in services - the key part of the basket for the RBA - slowed from 4.1% to 3.3%yr, its lowest since May 2022. Aside from holiday travel, sports and cultural services and insurance recorded declines in May's update, weighing on services inflation. Goods inflation remained low at 1%yr.    

Overall, the key takeaway from today's report is that inflation is slowing broadly across the basket. The various measures of underlying inflation slowed in May to sit at or near the midpoint of the RBA's band: trimmed mean 2.8% to 2.4%yr; CPI ex-volatile items 2.9% to 2.5%yr; and CPI ex-volatile items and holiday travel down from 2.7% to 2.6%yr (seasonally adjusted).